Mid-to-High End Housing Market in Brazil still has Legs

The housing market in Brazil has experienced steady growth and rapidly rising housing prices over the past five years. Government policies, the increasing availability and use of mortgages and rising incomes have all played a role. While the housing market is healthy, the economy in Brazil is softening and the growth outlook continues to become more muted. Despite some challenges, there are still opportunities for investing in real estate and housing. That said, some divergence is expected between different cities and the market served – high, middle and low income.

Hedge funds, real estate funds and private equity firms that invested in Brazil’s housing market have generally done well since 2007. Prices are up dramatically from five years ago. According to Fipe-Zap, housing prices are up by 197% and 243% in São Paulo and Rio de Janeiro since 2008. While some see this as signs of a bubble, others believe this market has a long way to go.

Emerging markets are under increased scrutiny by investor’s largely, with funds and investment dollars returning to developed markets. While certain countries have significant challenges, others still have opportunities for investment and benefit from the positive long-term trends – more rapid population growth, increased purchasing power and an emerging middle class. Given the increasing divergence, investing needs to become more targeted by country, sector and even positioning within that sector. The housing market in Brazil is one of these market that has potential for growth.

The middle and upper end of the real estate market can continue to expand in Brazil. The availability of financing, especially the willingness of banks to expand their mortgage portfolios, is fueling the market.

The mortgage loan portfolio in Brazil was over 8% of GDP at the end of 2013 and is up from just 1.8% in 2007. BNamericas indicated the segment could reach 10% of GDP by 2015 and 20% by in 2023. In the US, mortgages are 75% of GDP and range from 40%-60% in the leading world economies. While this is helping Brazil, the increasing availability of mortgages can also drive the market in much of Latin America of the next ten years.

While some raise concerns that the housing growth in Brazil is similar to the bubble created in the US, it is important to note some key differences in how the markets function. First, the lack of a securitization market in Brazil puts more risks on the banks. The banking sector in Brazil is known for being very conservative in its approach. As a result of the conservative nature and lack of securitizations, the banks are more diligent on who they lend to since they hold most of the loans. That said, the Minha Casa, Minha Vida program has created some issues in a portion of the mortgage market through subsidized lending.

The Minha Casa, Minha Vida (My House My Life) program was created to increase the availability of affordable housing in Brazil, where the housing deficit is estimated between 6-8 million homes with up to 90% of that deficit in low income homes. The program has stimulated demand for housing developers, particularly those that focus on affordable housing. MRV Engenharia is almost exclusively focused on this portion of the market and Directional is also affordable housing developer.

Over the past year, reports indicate that defaults and other issues are starting to plague the program and that changes or a total revamp is needed. This creates a more uncertain outlook for this portion of the market.

All this said, the program is popular and politicians are not making changes with the election in Brazil scheduled for October 5, 2014. An overhaul is not expected until after the election.

Long-term trends in Brazil remain favorable. Around 75% of people own homes in Brazil but an estimated 85% of those homes are low quality, often self-built one room units. This creates a substantial opportunity for growth in affordable housing.

While the housing market in Brazil has some challenges, discussed in a recent Financial Times article, the long-term trends, increasing use of mortgages both support steady growth in the housing market. There are significant investment opportunities in the market but using caution about what city, and even what part of that city investors focus on is increasingly important.